Search This Blog

Sunday, October 16, 2011

Market Thought... tired, hungry and wounded

I wish our political leadership (and aspiring leadership) were intelligent enough to remember this statement. The idea of America is not buried in some past debate against State vs Federal level authority, it is the quote above.

And while many, including the Tea Partiers, distance themselves away from the Occupy Wall Street crowd, the message is the same. Everyone wants the same thing: a far more efficient government, with clarity in leadership, looking out for the little guy.

A plan, will allow corporations to focus their spending and unleash their cash hoard facilitating growth. In the meantime the US economy is stagnant. Adding the threat of an EU inspired credit freeze, leaves everyone taking a far more negative tone.

With out a threat to a credit freeze, the SP500 has absolutely no basis to trade with a trailing multiple of 11-12. This is historically very low trading range reserved for extreme scenarios. Q3 esp estimates for the SP500 is $24.64. So far reports have been very good, except for materials and industrials. This estimate should hold firm, potentially giving the SP500 with a trailing eps of $89. A 12-14 multiple range with an eps of 89 is 1067-to-1245.

Usually the high end market multiple should be 15-17, but the EU austerity measures and stagnant US economy (with no plan in place) is no place for optimistic multiples. IMO, a 14 multiple is reasonable for steady global GDP growth.

As this quarter funnels through, end of year SP500 eps should be around $92, if not slightly higher. That will lead the market to trade toward 1290 with a multiple of 14. This move will be facilitated by other uncertainties easing. The uncertainties include:

With these uncertainties removed, the market may even be able to trade at a multiple of 15.

From a technical perspective, the SP500 is at its high-end trading range, but many stocks and sectors are forming bottoms. They have gone straight up in a weeks time, and based on the above market fundie assessment, stocks should consolidate, allowing for entries before the year end rally toward 1290-1300.